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ABSTRACT
This paper econometrically investigates the effect of Bilateral Investment Treaties (BITs) on Foreign Direct Investment (FDI) into five South Asian countries. It employs an extensive panel data model to conclude that the BITs signed by Bangladesh, India, Pakistan, Nepal and Sri Lanka between 1970 and 2014 have not led to an increase in FDI- a result that is later established on theoretical grounds as well. When this conclusion is juxtaposed with compelling literature on the BIT's deleterious impact on domestic sovereignty and independent policy space, the scope for a pareto superior outcome is envisaged; this outcome is shown to be a Nash equilibrium using an augmented prisoners' dilemma model with a provision for mutual cooperation.
Keywords: Bilateral Investment Treaties, Foreign Direct Investment, South Asia
1.INTRODUCTION
Since most structural determinants of FDI, especially of the market seeking variety, remain outside the direct control of short-term policymaking, two sets of measures acquire crucial significance for capital-deficient countries: unilateral regulatory changes, such as opening up previously restricted industries to foreign capital; and bilateral agreements in which states commit to binding obligations with respect to repatriating profits, dispute settlement etc. (Berger et al, 2012). A bilateral investment treaty, in establishing the terms and conditions for private investment by nationals and companies of one state in another state, falls within the latter category of policy instruments. This treaty has gained immense fervour amongst policymakers in the developing world, suggested by the fact that between 1990 and 2009, the number of BITs signed by developing countries increased from 200 to over 2000 (Colen et al, 2014). South Asian countries too have not shied away from jumping onto the bandwagon, and have signed an impressive total of 203 treaties till date, with India maintaining one of the largest BIT networks in the world. Surprisingly, then, there exists sparsely little evidence which attests to the treaty delivering on its number one objective for countries in this region, i.e. increasing inward foreign investment. Few studies have tackled this question from a national perspective, (Banga, 2003; Kathuria, 2016) while no author has yet investigated the promise of BITs for the entire South Asian region. As far as large sample studies are concerned, which use data for a number of developing countries, prevailing evidence...